H&P to spin off oil and gas division, then merge it with Key Production

Feb. 25, 2002
Tulsa-based contract drilling and service company Helmerich & Payne Inc. said Monday it would spin off its oil and gas division as a separate public firm to be called Cimarex Energy Co., which will in turn acquire Key Production Co. of Denver.

By Steven Poruban
Senior Staff Writer
HOUSTON, Feb. 25 -- Tulsa-based contract drilling and service company Helmerich & Payne Inc. said Monday it would spin off its oil and gas division as a separate public firm to be called Cimarex Energy Co., which will in turn acquire Key Production Co. of Denver.

Based on Key Production's current share price, newly formed Cimarex will have a pro forma equity market value of $600 million, the companies said. The new company will be based in Denver, while its operational headquarters will be based in Tulsa.

Deal details

Under terms of the deal, H&P will distribute all of Cimarex's outstanding common stock shares to its shareholders. Wholly owned Cimarex will then merge with Key Production in a stock-for-stock deal, in which H&P shareholders will receive 0.53 shares of Cimarex common stock for each share of H&P common. Key Production shareholders, meanwhile, will receive 1 share of Cimarex common stock for each share of Key common.

Once the deal is completed, holders of H&P outstanding common shares will own 65.25% of common stock of Cimarex, and Key Production shareholders will own 34.75%, both on a diluted basis. Also, the new firm will seek to change its accounting method from "successful efforts" to "full cost," which is used by H&P.

H&P CEO Hans Helmerich said that the transaction would allow for H&P shareholders to have "additional flexibility in their holdings: shares of a pure-play drilling company and shares of an oil and gas enterprise, both with management teams that will be able to focus exclusively on their respective businesses."

Mick Merelli will serve as chairman, CEO, and president of the new Cimarex while serving as vice-president, exploration and production, for H&P. Steve Shaw will serve as executive vice-president of the new company. Three H&P executives and four from Key Production will round out Cimarex's leadership.

Both companies have said that, at this time, "substantially all" current employees of Key Production and H&P's oil and gas division will be retained by the new firm.

On a pro forma basis, Cimarex will have proved reserves of 392 bcfe as of Dec. 31, 2001, of which 78% is natural gas and 98% is proved developed. Combined production of the new firm for 2002 will be 190 MMcfed, the companies said. Operations will be focused 64% in the Midcontinent region, mainly in Oklahoma and Kansas.

Both company boards have unanimously approved the transaction. Closing of the deal, which is expected to occur in the third quarter, awaits final approval from Key Production shareholders as well as regulators; no approval will be required by H&P shareholders, the companies said.

Reaction

The transaction will be "a good move for Key [Production]," said James Mullins, research associate, oil and gas, with Houston-based Raymond James & Associates Inc. The new company will gain some high-quality gas assets and will gain a low level of debt, he said, giving them a strong balance sheet.

"The deal boosts the new company into the mid-cap level, giving it increased access to the capital markets," Mullins said. Key Production is currently at the $220 million capitalization level.

Contact Steven Poruban at [email protected].